Alexey Loza CIS Oil & Gas Leader Baku, Azerbaijan May 2013
Stormy last five years Extreme economic uncertainty (GDP growth slowdown from 4.3% in 2010 to 2.6% in 2012) Unconventional resource boom Global gas market evolution (including LNG development) Serial geopolitical uncertainty/unrest Price volatility (2008 US$98 per barrel; 2009 US$62 per barrel; 2010 UD$80 per barrel; 2011 US$111 per barrel; 2012 US$112 per barrel) NOC/IOC dynamics: Internationalizing NOCs access to supply, markets and/or technology Partnership/joint venture model dominates Some challenges from rising protectionism Arctic frontier: Technically recoverable resources of 412 billion boe (two thirds natural gas, more than half in Russian territory) High cost, high risk Partnership to be critical From the depths of despair to the thrills of discovery and technology Page 2
Top global oil and gas stories of 2012 1Q 2013 US as new Saudi Arabia? European economy debt, denial and demand destruction Middle East turmoil again US gas renaissance sets up confrontation with gas-intensive industries Enormous gas potential found in offshore East Africa and East Mediterranean Second thoughts from Canada about selling its resources BP s sale of 50% share in TNK-BP to Rosneft and acquisition of 20% in Russian national oil company Australian LNG needs to find potential costs reductions amid growing competition from the US and Asia Strategic east route for Russian gas The renaissance of coal generation in Europe Shale gas coverage of new regions: Ukraine, South Africa and China The agreement for the Trans-Anatolian gas pipeline (TANAP) between Azerbaijan and Turkey Gas hydrate in Japan new challenge? Page 3
Oil market
Global oil: recent developments, prospects and risks Mixed fundamentals; uneasy global balance Demand drifting with strong non-opec supply gains? Increasing pressure on OPEC (Saudi Arabia) to curb production Continuing geopolitical uncertainty Who makes room for Iraq production gains? No progress with Iran; painfully low exports What will happen to Venezuela? Two Sudans one oil? Will North Africa re-erupt? Danger from North Korea? Light tight oil has changed the global market balance North American infrastructure bottlenecks and opportunities (crude by rail to East and West Coasts and the coast of Gulf of Mexico with new pipeline capacity) Shifting global crude flows: West African crude displaced from US, moving into Asia Page 5
Global oil: supply and demand While demand is being driven by the developing nations, supply from both the OPEC and non-opec producing regions is struggling to meet demand. World oil demand growth in 2013 is expected to be 0.8 mbd, slightly higher than 2012. The shift of oil demand from the West to the East is now rapidly accelerating. China and Middle East are main drivers of conversion. But due to the current development rates US seems to steadily increase its consumption in 2013 (PMI* in Q4 2012, 50.2; in Q1 2013, 54.6). OPEC spare capacity is still low, but pressures easing: expectations of 5% of global demand in 2013 (3% in 2011). Global oil demand growth * Purchasing Managers' Indices (PMI) are calculated by Markit based on data collected from manufacturers and service firms Source: BP Statistical Review of World Energy 2012, Oil & Gas Journal, International Energy Agency mbd 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 Advanced economies OPEC spare capacity (annual average, % of global demand) 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 Developing economies 2012 2012 2013F 2013F Page 6
Global oil: prices US$/bbl Number of contracts Oil prices dynamics 140 120 100 80 60 40 20 0 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013 Oil contracts dynamics 1,000,000 800,000 600,000 400,000 200,000 WTI Brent Urals 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: Bloomberg Hedge contracts WTI is losing the status of market indicator Non-hedge contracts US$/bbl Brent price forecast 115 110 110 110 110 110 105 104 101 100 97 95 94 90 85 2013F 2014F 2015F 2016F Forward contracts Median forecast Commodity price dynamics 2.0 1.5 1.0 0.5 0.0-0.5-1.0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Brent Nickel Copper Aluminum Page 7
Unconventional oil mbd 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Growing global demand in spite of uncertainties and rising oil prices to record levels have supported increase in development of unconventional oil resources. Undiscovered resources of unconventional oil are estimated at about 50% of all undiscovered resources. Yet-to-find unconventional oil resources are estimated at about 40% of total. Annual production of unconventional oil in case of the modest scenario is expected to rise from current 1 mbd(50 mln tonnes) to 2.8 mbd(140 mlntonnes) in 2035. Unconventional oil production, forecast Source: IMEMO RAN 2011 2020F 2035F Baseline scenario Unconventional oil success in US Technological achievements Scenarios of unconventional oil development Scenario Baseline scenario Unconventional success in US Technological achievements Costs per barrel US$50 + inflation US$30-$40(before 2015) + inflation US$30-$40(before 2015) + inflation Effects on countries North America growth; Brazil, China, Russia the same level NorthAmerica, Jordan, Australia; Morocco growth; Israel start; Brazil,China, Russia the same level Developmentin Western Europe, North America, Israel Page 8
Gas market
Global gas: recent developments, prospects and risks Shale revolution, but with collateral damage North American fundamentals strengthening, but could a price recovery trigger a relapse? Increasing politicization of the gas business US: environmentalism versus jobs/economic growth; is the re-industrialization dependent on continued very low gas prices? Europe: muddled energy policy and power politics Asia: a historic Russia/China supply agreement (but not detailed) North American incubator; replicating the revolution Chevron to Argentina, Shell to Ukraine, Shell and Eni to China Chinese shale issues controlled prices Global LNG competition to increase China buys into Mozambique LNG Asian NOCs signing North American off-take agreements Hopes for an Eastern Mediterranean LNG hub dimmed by Cypriot crisis Successful Japan gas hydrate test the next revolution? Page 10
Global gas: supply, demand and prices Gas share of global energy is expected to grow (first of all, CO 2 emissions). Global gas demand is expected to grow more than twice as fast as oil demand. Currently there are disparate regional markets. The gas market is globalizing, and distribution areas are expanding. The spread between US and Europe prices remains and creates conditions for export infrastructure in the US. Global gas demand Natural gas prices dynamics US$/mcm 600 500 400 300 200 100 3.2 tcm 0 4.8 tcm 2012 2030F Africa Latin America Middle East Europe (2) FSU (1) North America Asia/Oceania (1) Including Baltic states (2) Excluding Baltic states 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013 Henry Hub Zeebrugge Gazprom Source: Bloomberg, Gazprom Page 11
Global gas: can the revolution be exported? Can North American successes be replicated elsewhere? International shale development has been mixed. The first experience outside of US is important. Can development of huge unconventional gas resource base offset/moderate dominance of Middle East/Russia in conventional supply? infrastructure and hydraulic fracturing are challenging shale gas development. tcm Global gas resources (technically recoverable resources) 450 400 350 300 250 200 150 100 50 0 421 Conventional Eastern Europe/Eurasia Asia Pacific Africa OECD Europe Source: International Energy Agency 331 Unconventional Middle East North America Latin America Page 12
Perspectives for 2013 Economic hopes are brightening for US and Asia, but European prospects don t seem to be improving. Special attention should be paid to geopolitics, especially in the Middle East and North Africa. Continuing important US energy policy issues: Environmental law enforcement Environmental Protection Agency fracturing study deferred until 2014? Some LNG exports decisions are possible later this year, but what about crude oil exports? Keystone XL approval is expected by this summer, but could the recent spills break down project realization? New fuel fund proposal royalties to be diverted to R&D? What role is there for independents (e.g., Anadarko and Noble Energy) in megaprojects; will East Africa and possibly the East Mediterranean change the traditional find and farm model? Brazilian royalty distribution debate could it lead to additional taxes as states look to keep current resources, and could it affect contract sanctity? Page 13
Ernst & Young s Global Oil & Gas Center General information Ernst & Young s Global Oil & Gas practice consists of a network of more than 9,200 professionals with extensive experience working in the oil and gas industry. Our professionals serve a wide range of companies independent exploration and production companies, oilfield services companies, independent refiners, major integrated corporations and national oil companies. Our Global Oil & Gas Centers, like the professionals in our Global Oil & Gas practice, are strategically located in areas that allow us to best serve the needs of the oil and gas industry. In addition to our Houston, London, Moscow and Bahrain centers, we have satellite centers in Aberdeen, Beijing, Brisbane, Calgary, Cape Town, Perth, Rio de Janeiro, Singapore and Stavanger. Calgary Houston Americas 3,200 professionals 13 Global Oil & Gas Centers Rio de Janeiro Aberdeen London EMEIA 4,300 professionals Stavanger Bahrain Cape Town Moscow Singapore Perth Beijing Asia Pacific 1,700 professionals Brisbane Page 14
Ernst & Young s Global Oil & Gas Center thought leadership Global LNG: will new demand and new supply mean new pricing? The Norwegian oil field services analysis 2012 Arctic oil and gas Ernst & Young s global oil and gas capabilities Global oil and gas reserves study Global oil and gas transactions review Innovative use of helium Global oil and gas tax guide Page 15
Contacts Alexey Kondrashov Ernst & Young (CIS) B.V. Partner, Global Oil & Gas Tax Leader Tel.: +7 495 662 9394 Email: alexey.kondrashov@ru.ey.com Alexey Loza Ernst & Young (CIS) B.V. Partner, CIS Oil & Gas Leader Tel.: +7 495 641 2945 Email: alexey.loza@ru.ey.com Ilgar Veliyev Ernst & Young Holdings (CIS) B.V. Azerbaijan Republic Azerbaijan Country Managing Partner Tel.: +99412 4907020 Email: ilgar.veliyev@az.ey.com Turgay Teymurov Ernst & Young Holdings (CIS) B.V. Azerbaijan Republic Partner, Azerbaijan ECU Leader Tel.: +99412 4907020 Email: turgay.teymurov@az.ey.com Page 16
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